Slide 1CHAPTER OUTLINEEconomics and Opportunity CostChoices Have ConsequencesSlide 5Figures 1-4 Building The Production Possibilities FrontierSlide 7Slide 8Slide 9Slide 10Increasing and Constant Opportunity CostThe Big PictureMarkets in a Circular Flow DiagramActors in a Circular Flow DiagramThe Circular Flow DiagramThinking Economically: Marginal AnalysisPositive and Normative AnalysisEconomics IncentivesLogical FlawsKick it Up a NotchFigure 7 Illustrating Increasing Opportunity CostFigure 8 Illustrating Constant Opportunity Cost1-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 1 Economics: The Study Of Opportunity Cost1-2©2015 McGraw-Hill Education. All Rights Reserved CHAPTER OUTLINE•Economics And Opportunity Cost•Modeling Opportunity Cost Using A Production Possibilities Frontier•Attributes Of The Production Possibilities Frontier•Thinking Economically•Kick it Up a Notch: Demonstrating Constant And Increasing Opportunity Cost1-3©2015 McGraw-Hill Education. All Rights Reserved Economics and Opportunity Cost•Economics: the study of the allocation and use of scarce resources to satisfy unlimited human wants1-4©2015 McGraw-Hill Education. All Rights Reserved Choices Have Consequences•Opportunity Cost•The forgone alternative of the choice madeOr•What you would have done had you not done what you did.1-5©2015 McGraw-Hill Education. All Rights Reserved Modeling Opportunity Cost Using a Production Possibilities Frontier Definitions•PPF: a graph which relates the amounts of different goods that can be produced in a fully employed society•Model: a simplification of the real world that we can manipulate to explain the real world•Simplifying Assumption: an assumption that may, on its face, be silly but allows for a clearer explanation•Scarce: not freely available and infinite•Resources: anything we either consume directly or use to make things that we will ultimately consume1-6©2015 McGraw-Hill Education. All Rights Reserved Figures 1-4 Building The Production Possibilities FrontierSodaPizzaSP0XYZM1-7©2015 McGraw-Hill Education. All Rights Reserved A Fully Labeled Production Possibilities Frontier: The Case When People are DifferentSPSodaPizza0XYZMUnemploymentAttainableUnattainable1-8©2015 McGraw-Hill Education. All Rights Reserved SodaPizza0Unemployment(just inside the curve)Unattainable(outside the curve)Attainable(on the curve and on the inside)Figure 51-9©2015 McGraw-Hill Education. All Rights Reserved A Fully Labeled Production Possibilities Frontier: The Case When People are the SameSPSodaPizza0XYZMUnemploymentAttainableUnattainable1-10©2015 McGraw-Hill Education. All Rights Reserved SodaPizza0Unattainable(outside the curve)Attainable(on the curve and on the inside)Unemployment(just inside the curve)Figure 61-11©2015 McGraw-Hill Education. All Rights Reserved Increasing and Constant Opportunity Cost•Increasing Opportunity Cost•Exists when the additional resources required to produce an additional unit grows as more output is produced.•Likely to occur when people are different in their skills.•Constant Opportunity Cost•Exists when the additional resources required to produce an additional unit remains the same as more output is produced. •Likely to occur when people are identical in their skills.1-12©2015 McGraw-Hill Education. All Rights Reserved The Big Picture•circular flow model: A model that shows the interactions of all economic actors•Markets are where the interactions take place•Actors are the entities interacting1-13©2015 McGraw-Hill Education. All Rights Reserved Markets in a Circular Flow Diagram•Market: Any mechanism by which buyers and sellers negotiate an exchange•Factor Market: A mechanism by which buyers and sellers of labor and financial capital negotiate an exchange.•Goods and Services Market: A mechanism by which buyers and sellers of goods and services negotiate an exchange.•Foreign Exchange Market: A mechanism by which buyers and sellers of the currencies of various countries negotiate an exchange.1-14©2015 McGraw-Hill Education. All Rights Reserved Actors in a Circular Flow Diagram•Households•Firms•Government1-15©2015 McGraw-Hill Education. All Rights Reserved The Circular Flow Diagram1-16©2015 McGraw-Hill Education. All Rights Reserved Thinking Economically: Marginal Analysis•Optimization Assumption: an assumption that suggests that the person in question is trying to maximize some objective•Marginal Benefit: the increase in the benefit that results from an action•Marginal Cost: the increase in the cost that results from an action•Net Benefit: the difference between all benefits and all costs1-17©2015 McGraw-Hill Education. All Rights Reserved Positive and Normative Analysis•Positive Analysis: a form of analysis that seeks to understand the way things are and why they are that way•Normative Analysis: a form of analysis that seeks to understand the ways things should be1-18©2015 McGraw-Hill Education. All Rights Reserved Economics Incentives•Incentive: something that influences the decisions we make•Examples: prices influence the amount we buy; taxes influence how much we work and save1-19©2015 McGraw-Hill Education. All Rights Reserved Logical Flaws•Fallacy of Composition: the mistake in logic that suggests that the total economic impact of something is always and simply equal to the sum of the individual parts•Correlation = Causation: the mistake that suggests that because two variables are correlated that one caused the other to happen.1-20©2015 McGraw-Hill Education. All Rights Reserved Kick it Up a NotchDemonstrating Increasing and Constant Opportunity Cost1-21©2015 McGraw-Hill Education. All Rights Reserved Figure 7 Illustrating Increasing Opportunity CostProduction Possibilities FrontierPizzaSoda0 1 2 310987654321Opportunity Cost of going from 0 units of Pizza to 1 unit of pizzaOpportunity Cost of going from 1 unit of Pizza to 2 units of pizzaOpportunity Cost of going from 2 units of Pizza to 3 units of pizza1-22©2015 McGraw-Hill Education. All Rights Reserved Figure 8 Illustrating Constant Opportunity CostProduction Possibilities FrontierPizzaSoda0 1 2 3987654321Opportunity Cost of going from 0 units of Pizza to 1 unit of pizzaOpportunity Cost of going from 1 unit of Pizza to 2 units of pizzaOpportunity Cost of going from 2 units of